State of the Union: The Real Measure of Foreign Aid

It is a truth universally acknowledged that the European Union’s methods of disbursing foreign aid could stand improvement. Chris Patten, the EU commissioner responsible for external affairs, certainly thinks s He’s been among the leading critics of an aid program that — while among the world’s leaders in “official development assistance,” the standard by which foreign-aid donors are compared — managed to lose track of $10 billion of its budget.

At the same time, the conventional wisdom holds that when it comes to foreign aid, the United States is something of a Scrooge. Richard Gardner, a former U.S. ambassador to Italy and Spain, claims that Washington’s aid compares “unflatteringly” to other donors and argues, in the latest issue of Foreign Affairs, that “an effective foreign policy will simply be impossible without more money.” Likewise, the Development Assistance Committee based in Paris as part of the Organization for Economic Cooperation and Development — reproaches Americans in its latest report: “The United States [development aid] total is likely to stay around the same as the total for the four `front runner’ DAC countries, even though those countries’ combined population barely exceeds that of California.”

A sorry state of affairs, then, for the public side of the West’s international giving. Yet things may not be so bad as they seem, at least in the U.S. Yes, America ranks last among developed countries in the percentage of its GNP that it spends on foreign aid. Yet this figure is misleading. The DAC measure does not include American international giving from foundations, universities, corporations, churches and individuals — which is almost three times larger than government aid flows. Such figures are not published by DAC or even by the U.S. Agency for International Development. This is a critical omission since private giving by other OECD members is, almost certainly, much less than America’s. Their philanthropic traditions and tax structures do not encourage such giving to the same extent as in the U.S. If the EU wants to ensure that its foreign aid is put to good use, it would do well to follow America’s example by opening the way for greater private giving.

The first fact to come to grips with is that massive foreign-aid transfers do not cure poverty. Egypt and Pakistan, both of which have been among the largest beneficiaries of foreign aid over the years, have not exactly prospered economically as a result. Smaller aid recipients, such as Kenya and Zimbabwe, have fared even worse. The reason for this is simple: Foreign aid tends to reward governments that have pursued failed economic strategies, and often only forestalls needed changes in policy.

The key element of long-term economic growth is private investment and lending (private direct investment, international bank lending, bond lending). When countries attract private capital, they can sustain development over the long run. Not long ago, international-resource flows to developing countries were almost exclusively governmental. Since 1992, however, they have become primarily private.

By now, global private-resource flows far exceed total government aid to developing countries. Official aid in 1998 came to $88.3 billion, compared to total private flows of $147.2 billion. Private flows were even more significant in 1997, where they accounted for 76% of all external development finance. They fell in 1998 because of the Asian, Russian and Latin American economic crises. But when statistics for 1999 become available, they are likely to show that the percentage has again grown. On this most important measure of international generosity private investment and lending — the U.S. sends some $36 billion to developing countries. Germany comes in second with $15.6 billion.

The EU and other European donors can encourage more private giving through tax incentives and matching grants from government partnerships. Private philanthropy creates local partnerships, meets real needs, moves faster and works better than government aid. Besides, private giving leaves no mountain of debt from poorly conceived loans, which further impoverish poor nations.

When government money is involved, what matters isn’t so much the amount of money given, but how well the money is spent. A case in Poland provides a useful example. The collapse of communism in 1989 meant that already meager public hospital budgets were decimated. At the Litewska Children’s Hospital, one of Warsaw’s oldest and largest pediatric teaching hospitals, medical staff worked without running hot water, and doctors had to carry patients from one floor to anther since elevators usually didn’t work. Suddenly hospital administrators had to find their own funding and meet the needs of their own communities and patients, and not the central planners.

Aided by a small planning grant from the U.S. foreign-aid program, an American hospital created a partnership with Litewska. American volunteers donated time and money to establish a private board for fund-raising and to supervise the new management in the hospital.

In just one year — less than half the time it takes to design and approve a typical government aid project Litewska had commitments of $1.5 million to renovate the hospital, 60 Polish volunteers, and donations from major U.S. and Polish corporations. The small U.S. grant has run out long ago, and the hospital thrives.

Finally, foreign aid cannot substitute euros and cents for competence and honesty. The poorest countries, where much less private investment is flowing because of corruption and inefficiency, cannot grow without open societies, free markets and rule of law to combat corruption. No amount of aid money will help Zimbabwe emerge from its current crisis so long as President Mugabe continues to pursue his violent policy of land seizures.

Private donors — whether they are charitable philanthropies or profit-seeking corporations — are generally better than governments at targeting money where it’s needed most, tracking projects closely, cutting out waste, eliminating fraud and getting real results. If Europe wants to put its charitable resources to good use, it would do well to take the private route.